For the fiscal year ended December 31, 2003
OR
Commission File Number 0-13400
NTS-PROPERTIES V,
A MARYLAND LIMITED PARTNERSHIP
(Exact name of registrant as specified in its charter)
| Maryland | 61-1051452 |
| (State or other jurisdiction of incorporation or | (I.R.S. Employer Identification No.) |
| organization) | |
| 10172 Linn Station Road | 40223 |
| Louisville, Kentucky | (Zip Code) |
| (Address of principal executive offices) |
Registrant’s telephone number, including area code: (502) 426-4800
Securities registered pursuant to Section 12(b) of the Act:
| None | None |
| (Title of each class) | (Name of each exchange on which registered) |
Securities pursuant to Section 12(g) of the Act:
Limited Partnership Interests
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Section 229.405 of this chapter) is not contained herein, and will not be contained, to the best of the registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
Indicate by check mark whether registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934). Yes [ ] No [X]
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was sold, or the average bid and asked price of such common equity, as of June 30, 2003: No aggregate market value can be determined because no established market exists for the limited partnership interests.
TABLE OF CONTENTS
PART I
| Pages | ||||
| Items 1. and 2. | Business and Properties | 3-14 | ||
| Item 3. | Legal Proceedings | 14-16 | ||
| Item 4. | Submission of Matters to a Vote of Security Holders | 16 |
PART II
| Item 5. | Market for Registrant's Limited Partnership Interests and Related Partner Matters |
17 | ||
| Item 6. | Selected Financial Data | 18-19 | ||
| Item 7. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
19-32 | ||
| Item 7A. | Quantitative and Qualitative Disclosures About Market Risk |
33 | ||
| Item 8. | Consolidated Financial Statements and Supplementary Data | 34-57 | ||
| Item 9. | Change in and Disagreements with Accountants on Accounting and Financial Disclosure |
58 | ||
| Item 9A. | Controls and Procedures | 59 |
PART III
| Item 10. | Directors and Executive Officers of the Registrant | 60-61 | ||
| Item 11. | Management Remuneration and Transactions | 62 | ||
| Item 12. | Security Ownership of Certain Beneficial Owners and Management |
63 | ||
| Item 13. | Certain Relationships and Related Transactions | 64-65 | ||
| Item 14. | Principal Accountant Fees and Services | 65 |
PART IV
| Item 15. | Exhibits, Consolidated Financial Statement Schedules and Reports on Form 8-K |
66-71 | ||
| Signatures | 72 |
2
Some of the statements included in this Form 10-K, particularly those included in Part I, Items 1 and 2 — Business and Properties, and Part II, Item 7 — Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”), may be considered “forward-looking statements” because the statements relate to matters which have not yet occurred. For example, phrases such as “we anticipate,” “believe” or “expect” indicate that it is possible that the event anticipated, believed or expected may not occur. If these events do not occur, the result which we expected also may, or may not, occur in a different manner, which may be more or less favorable to us. We do not undertake any obligation to update these forward-looking statements.
Any forward-looking statements included in MD&A, or elsewhere in this report, reflect our general partner’s best judgment based on known factors, but involve risks and uncertainties. Actual results could differ materially from those anticipated in any forward-looking statements as a result of a number of factors, including but not limited to those discussed below. Any forward-looking information provided by us pursuant to the safe harbor established by the Private Securities Litigation Reform Act of 1995 should be evaluated in the context of these factors. See Part II — Item 7 for Cautionary Statements.
NTS-Properties V, a Maryland limited partnership (the “Partnership”), is a limited partnership organized under the laws of the state of Maryland on April 30, 1984. The general partner is NTS-Properties Associates V, a Kentucky limited partnership (the “General Partner”). The general partners of the General Partner are NTS Capital Corporation and J.D. Nichols. As of December 31, 2003, the Partnership owned the following properties and joint venture interests listed below. As used in this Form 10-K the terms “we,” “us” or “our,” as the context requires, may refer to the Partnership or its interests in this property and these joint ventures:
| · | Commonwealth Business Center Phase II, a business center with approximately 65,700 net rentable square feet located in Louisville, Kentucky, constructed by us. |
| · | A joint venture interest in The Willows of Plainview Phase II, a 144-unit luxury apartment complex located in Louisville, Kentucky, constructed by the joint venture between us and NTS-Properties IV, an affiliate of our General Partner. Our percentage interest in the joint venture was 90.30% on December 31, 2003. |
3
| · | A joint venture interest in the Lakeshore/University II Joint Venture (the “L/U II Joint Venture”). The L/U II Joint Venture was formed on January 23,1995 among us and NTS-Properties IV, NTS-Properties Plus Ltd. and NTS/Fort Lauderdale, Ltd., affiliates of our General Partner. Our percentage interest in the joint venture was 81.19% on December 31, 2003. |
A description of the properties owned by the L/U II Joint Venture as of December 31, 2003 appears below:
| · | Lakeshore Business Center Phase I — a business center with approximately 104,100 net rentable square feet located in Fort Lauderdale, Florida, acquired complete by the joint venture. |
| · | Lakeshore Business Center Phase II — a business center with approximately 96,600 net rentable square feet located in Fort Lauderdale, Florida, acquired complete by the joint venture. |
| · | Lakeshore Business Center Phase III — a business center with approximately 38,900 net rentable square feet located in Fort Lauderdale, Florida, constructed by the joint venture. |
We or the joint ventures in which we are a partner have a fee title interest in the above properties. We believe that our properties are adequately covered by property insurance.
As of December 31, 2003, our properties or joint ventures were encumbered by mortgages as shown in the table below:
Interest Maturity Balance
Property Rate Date on 12/31/03
- ------------------------------------------- ----------------- ------------ -----------------
The Willows of Plainview Phase II 7.20% 01/05/13 (1) $ 2,319,883
The Willows of Plainview Phase II 7.20% 01/05/13 (1) $ 1,385,536
Lakeshore Business Center Phase I 8.125% 08/01/08 (2) $ 3,120,096
Lakeshore Business Center Phase II 8.125% 08/01/08 (2) $ 3,356,890
Lakeshore Business Center Phase III LIBOR + 2.5% 10/01/05 (3) $ 2,632,387
Commonwealth Business Center Phase II LIBOR + 2.75% 11/01/04 (4) $ 800,000
| (1) | Current monthly principal payments are based upon a 15-year amortization schedule. At maturity, we believe the mortgages will have been repaid based on the current rate of amortization. |
| (2) | Current monthly principal payments are based upon a 12-year amortization schedule. We expect the outstanding balances at maturity will be approximately $757,000 and $814,000, respectively. |
| (3) | The construction loan for Lakeshore Business Center Phase III requires interest payments only through January 2005. Principal payments will be required starting February 1, 2005. We anticipate replacing the construction loan with permanent financing at or before its maturity. |
| (4) | The short term mortgage for Commonwealth Business Center Phase II requires interest payments only through November 2004. We anticipate replacing the short term mortgage with additional financing at or before its maturity. |
4
We are engaged solely in the business of developing, constructing, owning and operating residential apartments and commercial real estate. See Part II, Item 8 — Note 9 for information regarding these operating segments.
General
Our current investment objectives are consistent with our original objectives, which are to provide cash distributions from the operation or financing of our properties, obtain long-term capital gain treatment on the sale or refinancing of properties, provide limited partners with deferrals of federal income taxes, and preserve limited partners’ capital. Proceeds of any sale or refinancing of our properties may be distributed to limited partners, or may be used to repay debt or to make capital improvements to properties.
The properties we currently own, which are described in the following section, are the same as those we originally acquired. Our properties are in a condition suitable for their intended use. We periodically evaluate whether to retain, refinance, or sell or otherwise dispose of these properties, with a view toward meeting the above investment objectives, including the making of distributions. In deciding whether to sell a property, we will consider factors such as potential capital appreciation, mortgage pre-payment penalties, market conditions, cash flow and federal income tax considerations, including possible adverse federal income tax consequences to the limited partners. Distributions have been suspended to fund current and future capital improvements and debt repayment. For information on distributions, see Part II, Item 5 of this Form 10-K. In addition, see Item 8, Note 8 and Note 11 for information regarding our proposed merger with other affiliated entities.
Commonwealth Business Center Phase II
As of December 31, 2003, there were 9 tenants leasing space aggregating approximately 40,800 square feet of rentable area at Commonwealth Business Center Phase II. All leases provide for tenants to contribute toward the payment of common area maintenance expenses, insurance and real estate taxes. The tenants who occupy Commonwealth Business Center Phase II are professional service entities. The principal occupations/professions practiced include engineering and a switching station. Two tenants individually lease more than 10% of Commonwealth Business Center Phase II’s rentable area. The occupancy levels at the business center as of December 31 were 62% (2003), 73% (2002), 81% (2001), 73% (2000) and 86% (1999). See Part II, Item 7 for average occupancy information.
5
The following table contains approximate data concerning the major tenant leases in effect on December 31, 2003.
Year of Square Feet and % of Current Annual Rental
Major Tenant (1) : Expiration Net Rentable Area per Square Foot
- ------------------------------- ------------------ -------------------------- --------------------------
1 2011 13,846 (21.1%) $7.50
2 2008 11,674 (17.8%) $7.15
(1) Major tenants are those that individually occupy 10% or more of the rentable square footage.
The Willows of Plainview Phase II
Apartments at The Willows of Plainview Phase II include one and two-bedroom lofts and deluxe apartments and two-bedroom town homes. All apartments have wall-to-wall carpeting, individually controlled heating and air conditioning, dishwashers, ranges, refrigerators and garbage disposals. All apartments, except one-bedroom lofts, have washer/dryer hook-ups. The one-bedroom lofts have stackable washers and dryers. Tenants have access to and the use of coin-operated washer/dryer facilities, clubhouse, management offices, swimming pool, whirlpool and tennis courts.
Monthly rental rates at The Willows of Plainview Phase II start at $699 for one-bedroom apartments, $959 for two-bedroom apartments and $1,079 for two-bedroom town homes, with additional monthly rental amounts for special features and locations. Tenants pay all costs of heating, air conditioning, water, sewer and electricity. Most leases are for a period of one year. Apartments will be rented in some cases, however, on a shorter term basis at an additional charge. The occupancy levels at the apartment complex as of December 31 were 82% (2003), 89% (2002), 74% (2001), 89% (2000) and 87% (1999). See Part II, Item 7 for average occupancy information.
Lakeshore Business Center Phase I
As of December 31, 2003, there were 28 tenants leasing space aggregating approximately 73,500 square feet of the rentable area at Lakeshore Business Center Phase I. All leases provide for tenants to contribute toward the payment of common area maintenance expenses, insurance and real estate taxes. The tenants who occupy Lakeshore Business Center Phase I are professional service entities. The principal occupations/professions practiced include telemarketing services, financial services and dental equipment suppliers. There are no tenants that individually lease 10% or more of Lakeshore Business Center Phase I’s rentable area. The occupancy levels at the business center as of December 31, were 71% (2003), 71% (2002), 89% (2001), 85% (2000) and 73% (1999). See Part II, Item 7 for average occupancy information.
Lakeshore Business Center Phase II
As of December 31, 2003, there were 18 tenants leasing space aggregating approximately 75,300 square feet of the rentable area at Lakeshore Business Center Phase II. All leases provide for tenants to contribute toward the payment of common area maintenance expenses, insurance and real estate taxes. The tenants who occupy Lakeshore Business Center Phase II are professional service entities.
6
The principal occupations/professions practiced include medical equipment leasing, insurance services and credit research services. One tenant individually leases more than 10% of Lakeshore Business Center Phase II’s rentable area. The occupancy levels at the business center as of December 31 were 79% (2003), 81% (2002), 82% (2001), 86% (2000) and 72% (1999). See Part II, Item 7 for average occupancy information.
The following table contains approximate data concerning the major tenant lease in effect on December 31, 2003:
Year of Square Feet and % of Current Annual Rental
Major Tenant (1) : Expiration Net Rentable Area per Square Foot
- ------------------------------- ------------------ -------------------------- --------------------------
1 2008 27,868 (28.8%) $10.25
(1) Major tenants are those that individually occupy 10% or more of the rentable square footage.
Lakeshore Business Center Phase III
As of December 31, 2003, there were 4 tenants leasing space aggregating approximately 34,800 square feet of the rentable area at Lakeshore Business Center Phase III. All leases provide for tenants to contribute toward the payment of common area maintenance expenses, insurance and real estate taxes. The tenants who occupy space at Lakeshore Business Center Phase III are professional service entities. The principal occupations/professions practiced are insurance services, telecommunications and engineering. The building was constructed in the year 2000. Three tenants individually lease more than 10% of Lakeshore Business Center Phase III’s rentable area. The occupancy levels at the business center as of December 31 were 89% (2003), 37% (2002), 28% (2001) and 12% (2000). See Part II, Item 7 for average occupancy information.
The following table contains approximate data concerning the major tenant leases in effect on December 31, 2003:
Year of Square Feet and % of Current Annual Rental
Major Tenant (1) : Expiration Net Rentable Area per Square Foot
- ------------------------------- ------------------ -------------------------- --------------------------
1 2014 20,135 (51.8%) $11.50
2 2006 6,190 (15.9%) $14.60
3 2006 4,689 (12.1%) $14.71
(1) Major tenants are those that individually occupy 10% or more of the rentable square footage.
7
Additional operating data regarding our properties is furnished in the following table.
Federal Property Annual
Tax Basis Tax Rate Property Taxes
Wholly-Owned Properties ------------------ ----------------- ------------------
Commonwealth Business Center Phase II $ 4,833,834 .010935 $ 34,444
Joint Venture Properties
The Willows of Plainview II 8,154,861 .010935 56,796
Lakeshore Business Center Phase I 10,578,645 .024431 165,969
Lakeshore Business Center Phase II 12,613,428 .024431 190,364
Lakeshore Business Center Phase III 5,434,159 .024431 60,480
Depreciation for book purposes is computed using the straight-line method over the estimated useful lives of the assets which are 5-30 years for land improvements, 3-30 years for buildings and improvements, 3-30 years for amenities and the applicable lease term for tenant improvements. The aggregate cost of our properties for federal tax purposes in $42,053,881.
NTS Willows Phase II Joint Venture
On September 1, 1984, we entered into a joint venture agreement with NTS-Properties IV to develop, construct, own and operate a 144 — unit luxury apartment complex on an 8.29 acre site in Louisville, Kentucky known as The Willows of Plainview Phase II. The term of the joint venture shall continue until dissolved. Dissolution shall occur upon, but not before, the first to occur of the following:
| · | the withdrawal, bankruptcy or dissolution of a Partner or the execution by a Partner of an assignment for the benefit of its creditors; |
| · | the sale, condemnation or taking by eminent domain of all or substantially all of our assets, other than its cash and cash equivalent assets; |
| · | the vote or consent of each of the Partners to dissolve the Partnership; or |
| · | September 30, 2028. |
The apartment complex is encumbered by permanent mortgages with two insurance companies. Both loans are secured by a first mortgage on the property. The outstanding balance of the mortgages on December 31, 2003 is $3,705,419 ($2,319,883 and $1,385,536). The mortgages are recorded as a liability of the joint venture. Both mortgages bear interest at a fixed rate of 7.2% and are due January 5, 2013. Monthly principal payments are based upon a 15-year amortization
8
schedule. At maturity, we believe the loans will have been repaid based on the current rate of amortization.
The net cash flow for each calendar quarter is distributed to the partners in accordance with their respective percentage interests. The term “Net Cash Flow” means the excess, if any, of (A) the gross receipts from the operations of the joint venture property (including investment income) for such period plus any funds released from previously established reserves (referred to in clause (iv) below), over (B) the sum of (i) all cash operating expenses paid by the joint venture property during such period in the course of business, (ii) capital expenditures during such period not funded by capital contributions, loans or paid out of previously established reserves, (iii) payments during such period on account of amortization of the principal of any debts or liabilities of the joint venture property and (iv) reserves for contingent liabilities and future expenses of the joint venture property. “Percentage Interest” means that percentage which the capital contributions of a partner bears to the aggregate capital contributions of all partners. Net income or loss is allocated between the partners in accordance with their respective percentage interests. Our ownership share was 90.30% on December 31, 2003, 2002 and 2001.
Lakeshore/University II Joint Venture
On January 23, 1995, a joint venture known as the Lakeshore/University II Joint Venture (the “L/U II Joint Venture”) was formed among us and NTS-Properties IV, NTS-Properties Plus Ltd. and NTS/Fort Lauderdale, Ltd., affiliates of our General Partner, for purposes of owning Lakeshore Business Center Phases I and II, University Business Center Phase II (property sold during 1998) and certain undeveloped tracts of land adjacent to the Lakeshore Business Center development.
The table below identifies which properties were contributed to the L/U II Joint Venture and the respective owners of such properties prior to the formation of the joint venture.
Property Contributing Owner
- ----------------------------------------------- ------------------------------------------------
Lakeshore Business Center Phase I NTS-Properties IV and NTS-Properties V
Lakeshore Business Center Phase II NTS-Properties Plus Ltd.
Undeveloped land adjacent to the Lakeshore NTS-Properties Plus Ltd.
Business Center development (3.8 acres)
Undeveloped land adjacent to the Lakeshore NTS/Fort Lauderdale, Ltd.
Business Center development (2.4 acres)
University Business Center Phase II NTS-Properties V and NTS Properties Plus Ltd.
9
The term of the joint venture shall continue until dissolved. Dissolution shall occur upon, but not before, the first to occur of the following:
| · | the withdrawal, bankruptcy or dissolution of a Partner or the execution by a Partner of an assignment for the benefit of its creditors; |
| · | the sale, condemnation or taking by eminent domain of all or substantially all of the real property and the sale and/or collection of any evidences of indebtedness received in connection therewith; |
| · | the vote or consent of each of the Partners to dissolve the Partnership; or |
| · | December 31, 2030. |
The properties of the L/U II Joint Venture are encumbered by mortgages payable as follows:
Loan Balance
on 12/31/03 Encumbered Property
- ------------------------- --------------------------------------------
$ 3,120,096 Lakeshore Business Center Phase I
$ 3,356,890 Lakeshore Business Center Phase II
$ 2,632,387 Lakeshore Business Center Phase III
The loans are recorded as liabilities of the joint venture. The mortgages of Lakeshore Business Center Phases I and II bear interest at a fixed rate of 8.125% and are due August 1, 2008. Monthly principal payments are based upon a 12-year amortization schedule.
On March 14, 2003, we reached an agreement with the mortgage lender on the Lakeshore Business Center Phases I and II mortgages to suspend principal payments for twelve months beginning with the payments due May 1, 2003. The principal payments due to the lender will continue to be paid and deposited by the lender into an escrow account. We will then be allowed to draw upon the escrowed funds for specific capital improvements listed in the agreement. The agreement does not change any terms of the existing mortgage loans. However, the suspension of principal payments will result in significant balances remaining due on the loans at maturity in 2008, currently estimated to be approximately $757,000 and $814,000, respectively.
On June 1, 2003, we signed an amendment to the agreement reached on March 14, 2003 with the mortgage lender on the Lakeshore Business Center Phases I and II mortgages. The amendment suspended principal payments for twelve months beginning with the payments due June 1, 2003. The May 1, 2003 payments were applied to the principal balances. The amendment does not change any terms of the existing mortgage loans.
On October 1, 2003, we refinanced the mortgage loan on Lakeshore Business Center Phase III (which matured on September 8, 2003). The new loan will provide funds for tenant improvements, leasing commissions, closing costs and interest carry. The new loan is for $3,150,000, matures on
10
October 1, 2005 and has an outstanding balance of $2,632,387 as of December 31, 2003. The new loan has a variable interest rate based on the LIBOR daily rate plus 2.5% and is guaranteed by the joint venture partners, NTS-Properties V, NTS-Properties IV, NTS/Fort Lauderdale, Ltd. and ORIG, LLC, as well as NTS Corporation, an affiliate.
On July 1, 2000 and July 1, 1999, we contributed $500,000 and $1,737,000, respectively, to the L/U II Joint Venture. The other partners in the joint venture did not make capital contributions at that time. Accordingly, the ownership percentages of the other partners in the joint venture decreased. Effective July 1, 2000, our percentage of ownership in the L/U II Joint Venture is 81.19%, as compared to 79.45% prior to July 1, 2000, and 69.23% prior to July 1, 1999.
On July 23, 1999, the L/U II Joint Venture closed on the sale of 2.4 acres of land adjacent to the Lakeshore Business Center for a purchase price of $528,405. We had a 79.45% interest in the joint venture at that date. Our statement of operations reflects a net gain of approximately $71,000 for the year ended December 31, 1999.
The net cash flow for each calendar quarter is distributed to the partners in accordance with their respective percentage interest. The term “Net Cash Flow” means the excess, if any, of (A) the sum of (i) the gross receipts of the joint venture properties for such period (including loan proceeds), other than capital contributions, plus (ii) any funds released from previously established reserves (referred to in clause (B) (iv) below), over (B) the sum of (i) all cash operating expenses paid by the joint venture during such period in the course of business, (ii) capital expenditures paid in cash during such period, (iii) payments during such period on account of amortization of the principal of any debts or liabilities of the joint venture and (iv) reserves for contingent liabilities and future expenses of the joint venture, as established by the partners; provided, however, that the amounts referred to in (B) (i), (ii) and (iii) above shall only be taken into account to the extent not funded by capital contributions or paid out of previously established reserves. “Percentage Interest” means that percentage which the capital contributions of a partner bears to the aggregate capital contributions of all the partners. Net income or loss is allocated between the partners in accordance with their respective percentage interests pursuant to the joint venture agreements. Our ownership share was 81.19% on December 31, 2003, 2002 and 2001.
In June 2002, NTS-Properties Plus Ltd. one of the original members of the L/U II Joint Venture, merged into ORIG, LLC, (“ORIG”) an affiliate of ours. As a result of the merger, ORIG has succeeded to the interests of NTS-Properties Plus Ltd. in the joint venture. See the information under the caption “Ownership of Joint Ventures” in Part II, Item 7 of this Form 10-K.
Our properties are subject to competition from similar types of properties (including, in certain areas, properties owned or managed by affiliates of our General Partner) in the respective vicinities in which they are located. Such competition is generally for the retention of existing tenants at lease expiration or for new tenants when vacancies occur. We maintain the suitability and competitiveness
11
of our properties primarily on the basis of effective rents, amenities and service provided to tenants. Competition is expected to increase in the future as a result of the construction of additional properties. In the vicinity of The Willows of Plainview Phase II, there are two apartment communities scheduled to start construction in 2004 and three apartment communities that are currently under construction and scheduled for completion in 2004. Of the two apartment communities scheduled to start construction, one is planning to build a total of 502 apartments with 252 apartments expected to be completed in 2004. The other apartment community scheduled to begin construction in 2004 is planning to build 200 apartments. The three apartment communities currently under construction will have a total of 406 apartments upon completion. The largest of the three communities will have 250 units. Of the two remaining communities, one will have 120 apartments and the other will have 36 apartments.
NTS Development Company, an affiliate of our General Partner, directs the management of our properties pursuant to a written agreement (the “Agreement”). NTS Development Company is a wholly-owned subsidiary of NTS Corporation. Mr. J.D. Nichols has a controlling interest in NTS Corporation and is a general partner of NTS-Properties Associates V. Under the Agreement, NTS Development Company establishes rental policies and rates and directs the marketing activity of leasing personnel. NTS Development Company also coordinates the purchase of equipment and supplies, maintenance activity and the selection of all vendors, suppliers and independent contractors.
As compensation for its services, NTS Development Company received a total of $286,176 in property management fees for the year ended December 31, 2003. $224,205 was received from the commercial properties and $61,971 was received from the residential property. The fee is equal to 6% of gross receipts from commercial properties and 5% of gross receipts from residential properties.
In addition, the Agreement requires us to purchase all insurance relating to the managed properties, to pay the direct out-of-pocket expenses of NTS Development Company in connection with our operations, including the cost of goods and materials used for and on our behalf, and to reimburse NTS Development Company for the salaries, commissions, fringe benefits and related employment expenses of personnel.
The term of the Agreement between NTS Development Company and us was for an initial period of five years, and renewed thereafter for succeeding one-year periods, until cancelled. The Agreement is subject to cancellation by either party upon 60-days written notice. As of December 31, 2003, the Agreement is still in effect.
12
Information about our working capital practices is included in Management’s Discussion and Analysis of Financial Condition and Results of Operations in Part II, Item 7.
We do not consider our operations to be seasonal to any material degree.
Principals of the General Partner or its affiliates own or operate real estate properties that compete, directly or indirectly, with properties owned by us. Because we were organized by, and are operated by the General Partner, conflicts arising from our competition with properties owned by affiliated partnerships are not resolved through arms-length negotiations, but through the exercise of the General Partner’s judgment consistent with its fiduciary responsibility to the limited partners and our investment objectives and policies. The General Partner is accountable to the limited partners as a fiduciary and consequently must exercise good faith and integrity in handling our affairs. A provision has been made in our Partnership Agreement that the General Partner will not be liable to us except for acts or omissions performed or omitted fraudulently, in bad faith or with negligence. The Partnership Agreement provides for indemnification of the General Partner by us for liability resulting from errors in judgment or certain acts or omissions. The General Partner and its affiliates have the right to compete with our properties including the right to develop competing properties now and in the future, in addition to the existing properties which may compete directly or indirectly.
NTS Development Company, an affiliate of our General Partner, acts in a similar capacity for other affiliated entities in the same geographic region where we have property interests. As a result of the affiliation between NTS Development Company and our General Partner, there is a conflict of interest between our General Partner’s duty to the limited partners and its incentive to cause us to retain our properties because of the payment of fees to NTS Development Company. We believe the agreement with NTS Development Company is on terms no less favorable to us than those which could be obtained from a third party for similar services in the same geographical region in which the properties are located. The contract is terminable by either party without penalty upon 60-days written notice.
We have no employees. Under the terms of the property management agreement with NTS Development Company, NTS Development Company makes its employees available to perform services for us. In addition to the property management fees that we pay to NTS Development Company, we reimburse this affiliate for the actual costs of providing such services. See Part II, Item 8 — Note 7 and Part III, Item 13 for further discussions of related party transactions.
13
Our website address is www.ntsdevelopment.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act are available and may be accessed free of charge through the “About NTS” section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K.
On December 12, 2001, three individuals filed an action in the Superior Court of the State of California for the County of Contra Costa originally captioned Buchanan et al. v. NTS-Properties Associates et al. (Case No. C 01-05090) against our general partner, the general partners of four public partnerships affiliated with us and several individuals and entities affiliated with us. The action purports to bring claims on behalf of a class of limited partners. These claims are based on, among other things, tender offers made by the public partnerships and an affiliate of our general partner, as well as the operation of the partnerships by the general partners. The plaintiffs allege, among other things, that the prices at which limited partnership interests were purchased in these tender offers were too low. The plaintiffs are seeking monetary damages and equitable relief, including an order directing the disposition of the properties owned by the public partnerships and the distribution of the proceeds. No amounts have been accrued as a liability for this action in our consolidated financial statements. Under an indemnification agreement with our general partner, we are responsible for the costs of defending any such action.
On February 27, 2003, two individuals filed a class and derivative action in the Circuit Court of Jefferson County, Kentucky captioned Bohm et al. v. J.D. Nichols et al. (Case No. 03-CI-01740) against our general partner and the general partners of three public partnerships affiliated with us and several individuals and entities affiliated with us. On March 21, 2003, the complaint was amended to include the general partner of a public partnership affiliated with us and the general partner of a partnership that was affiliated with us but is no longer in existence. In the amended complaint, the plaintiffs purport to bring claims on behalf of a class of limited partners and derivatively on behalf of us and affiliated public partnerships based on alleged overpayments of fees, prohibited investments, improper failures to make distributions, purchases of limited partnership interests at insufficient prices and other violations of the limited partnership agreements. The plaintiffs are seeking, among other things, compensatory and punitive damages in an unspecified amount, an accounting, the appointment of a receiver or liquidating trustee, the entry of an order of dissolution against the public partnerships, a declaratory judgment and injunctive relief. No amounts have been accrued as a liability for this action in our financial statements. Our general partner believes that this action is without merit, and is vigorously defending it. On March 2, 2004, we, along with all defendants, filed a Motion to Dismiss the Bohm litigation. That Motion is currently pending before the court.
14
On June 20, 2003, our general partner, along with the general partners of four public partnerships affiliated with us, reached an agreement in principle (the “Settlement Agreement”) with representatives of the class of plaintiffs to settle the Buchanan action. This settlement is subject to, among other things, preparing and executing a settlement agreement to be presented to the court for preliminary and final approval. The proposed settlement would include releases for all of the parties for all of the claims asserted in the Buchanan litigation and the Bohm litigation. As part of the proposed settlement, the general partners have agreed, among other things, to pursue a merger of the partnerships along with other real estate entities affiliated with the general partners into a newly-formed entity. For more information on the merger, see Item 7, Proposed Merger.
On February 26, 2004, the Superior Court of the State of California for the County of Contra Costa preliminarily approved the settlement as set forth in the Stipulation and Agreement of Settlement jointly filed by the general partners (the “General Partners”) of NTS-Properties III, NTS-Properties IV, NTS-Properties V, NTS-Properties VI and NTS-Properties VII, Ltd. (the “Partnerships”), along with certain of their affiliates, with the class of plaintiffs in the action originally captioned Buchanan et al. v. NTS-Properties Associates et al. (Case No. C 01-05090) on December 5, 2003. The Superior Court’s order, which sets forth its preliminary determination that the Stipulation and Agreement of Settlement is within the range of reasonableness, and is fair, just and adequate to the class of plaintiffs, is filed as an attachment to our Form 8-K filed on March 1, 2004. The Superior Court has scheduled a hearing (the “Final Hearing”) on May 6, 2004, to finally determine, among other things, whether: (1) the Stipulation and Agreement of Settlement is fair, reasonable and adequate, and in the best interests of the class of plaintiffs, and (2) the Buchanan litigation should be dismissed with prejudice and on the merits in accordance with the Stipulation and Agreement of Settlement.
At the Final Hearing, any member of the class of plaintiffs may appear personally or through his or her counsel to object to the final approval of the Stipulation and Agreement of Settlement, the entry of a final judgment dismissing with prejudice the Buchanan litigation or the application for an award of attorneys’ fees and expenses to the counsel for the class of plaintiffs. To do so, a class member must file the following with the Superior Court and the attorneys for the class of plaintiffs and the General Partners and other defendants at least fourteen days prior to the Final Hearing: (1) a notice of the class member’s intention to appear at the Final Hearing, (2) a detailed statement of the class member’s specific objections and (3) the grounds for the objections and any documents that the class member desires the Superior Court to consider.
Pending the entry by the Superior Court of a final judgment and order dismissing the Buchanan litigation with prejudice, all members of the class of plaintiffs are barred and enjoined from: (1) transferring, selling, assigning or otherwise disposing of any limited partner units of the Partnerships, (2) granting a proxy to object to the merger of the Partnerships into NTS Realty Holdings Limited Partnership (“NTS Realty”) as contemplated by the joint consent solicitation statement/prospectus that NTS Realty filed with the Securities and Exchange Commission or (3) commencing a tender offer for the limited partner units of the Partnerships.
15
For the year ended December 31, 2003, our share of the legal costs for the Buchanan and Bohm litigations was approximately $204,000, which was included in our professional and administrative expenses.
We do not believe there is any other litigation threatened against us other than routine litigation arising out of the ordinary course of business, some of which is expected to be covered by insurance, none of which is expected to have a material effect on our financial position or results of operations, except as discussed herein.
None.
16
There is no established trading market for the limited partnership interests, nor is one likely to develop. We had 1,342 limited partners as of January 31, 2004. Cash distributions and allocations of income (loss) are made as described in Item 8 — Note 1D.
No distributions were paid during 2003, 2002 or 2001. Quarterly distributions are determined based on current cash balances, cash flow being generated by operations and cash reserves needed for future leasing costs, tenant finish costs and capital improvements. Distributions have been indefinitely suspended to fund current and future capital improvements and debt repayment. Our ability to pay distributions is dependent upon, among other things, our ability to refinance properties on favorable terms.
17
Years ended December 31:
2003 2002 2001 2000 1999
--------------- ---------------- --------------- --------------- ----------------
Total revenues $ 5,081,130 $ 5,006,595 $ 5,077,144 $ 4,756,468 $ 4,605,597
Operating income $ 188,622 $ 323,470 $ 613,336 $ 994,472 $ 768,939
Loss before
minority interest $ (667,354)$ (758,446)$ (462,553)$ (48,330)$ (90,500)
Minority interest $ (5,090)$ (74,459)$ (52,034)$ (10,123)$ (11,230)
Net loss $ (662,264)$ (683,987)$ (410,519)$ (38,207)$ (79,270)
Net loss allocated to:
General Partner $ (6,623)$ (6,840)$ (4,105)$ (382)$ (793)
Limited partners $ (655,641)$ (677,147)$ (406,414)$ (37,825)$ (78,477)
Net loss per limited
partnership interest $ (21.48) $ (22.19) $ (13.32) $ (1.24) $ (2.39)
Weighted average number
of limited partnership
interests 30,521 30,521 30,521 30,620 32,861
Cumulative net income
allocated to:
General Partner $ 48,606 $ 55,229 $ 62,069 $ 66,174 $ 66,556
Limited partners $ (6,453,939)$ (5,798,298)$ (5,121,151)$ (4,714,737)$ (4,676,912)
Cumulative taxable
income (loss) allocated to:
General Partner $ 160,343 $ 156,787 $ 158,336 $ 165,329 $ 146,496
Limited partners $ (8,354,381)$ (7,701,424)$ (6,706,294)$ (5,864,636)$ (5,723,508)
Distributions declared:
General Partner $ -- $ -- $ -- $ -- $ 12,649
Limited partners $ -- $ -- $ -- $ -- $ 1,252,275
Cumulative distributions
declared:
General Partner $ 168,176 $ 168,176 $ 168,176 $ 168,176 $ 168,176
Limited partners $ 16,641,479 $ 16,641,479 $ 16,641,479 $ 16,641,479 $ 16,641,479
At year end:
Land, buildings and
amenities, net $ 20,360,408 $ 20,764,422 $ 21,435,471 $ 22,074,949 $ 19,908,042
Total assets $ 22,385,446 $ 22,185,284 $ 23,268,453 $ 24,186,003 $ 23,880,328
Mortgages and notes
payable $ 13,614,792 $ 13,517,370 $ 13,792,816 $ 14,436,464 $ 14,143,157
The above selected financial data should be read in conjunction with the consolidated financial statements and related notes appearing elsewhere in this Form 10-K report.
18
The Emerging Issues Tasks Force (“EITF”) of the Financial Accounting Standards Board (“FASB”) reached a consensus on Issue No. 00-1, “Applicability of the Pro Rata Method of Consolidation to Investments in Certain Partnerships and Other Unincorporated Joint Ventures.” The EITF reached a consensus that a proportionate gross financial statement presentation (referred to as “proportionate consolidation” in the Notes to Consolidated Financial Statements) is not appropriate for an investment in an unincorporated legal entity accounted for by the equity method of accounting, unless the investee is in either the construction industry or an extractive industry where there is a longstanding practice of its use.
The consensus is applicable to financial statements for annual periods ending after June 15, 2000. We have applied the consensus to all comparative financial statements, restating them to conform with the consensus for all periods presented. The application of this consensus did not result in a restatement of previously reported partners’ equity or results of operations, but did result in a recharacterization or reclassification of certain financial statements’ captions and amounts. The affected data in the table above has been restated to provide comparable information for all periods presented.
Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with the Consolidated Financial Statements in Item 8 and the cautionary statements below.
General
A critical accounting policy is one that would materially effect our operations or financial condition, and requires management to make estimates or judgments in certain circumstances. These judgments often result from the need to make estimates about the effect of matters that are inherently uncertain. Critical accounting policies discussed in this section are not to be confused with accounting principles and methods disclosed in accordance with accounting principles generally accepted in the United States (“GAAP”). GAAP requires information in financial statements about accounting principles, methods used and disclosures pertaining to significant estimates. The following disclosure discusses judgments known to management pertaining to trends, events or uncertainties known which were taken into consideration upon the application of those policies and the likelihood that materially different amounts would be reported upon taking into consideration different conditions and assumptions.
19
Impairment and Valuation
Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” specifies circumstances in which certain long-lived assets must be reviewed for impairment. If the carrying amount of an asset exceeds the sum of its expected future cash flows, the asset’s carrying value must be written down to fair value. In determining the value of an investment property and whether the investment property is impaired, management considers several factors such as projected rental and vacancy rates, property operating expenses, capital expenditures and interest rates. The capitalization rate used to determine property valuation is based on the market in which the investment property is located, length of leases, tenant financial strength, the economy in general, demographics, environment, property location, visibility, age and physical condition among others. All of these factors are considered by management in determining the value of any particular investment property. The value of any particular investment property is sensitive to the actual results of any of these factors, either individually or taken as a whole. If the actual results differ from management’s judgment, the valuation could be negatively or positively affected.
Recognition of Rental Income
Our apartment community has operating leases with apartment residents with terms generally of twelve months or less. We recognize rental revenue related to these leases on an accrual basis when due from residents. In accordance with our standard lease terms, rental payments are generally due on a monthly basis.
Our commercial property leases are accounted for as operating leases. We accrue minimum rents on a straight-line basis over the terms of their respective leases. We structure our leases to allow us to recover a significant portion of our property operating, real estate taxes and repairs and maintenance expenses from our commercial tenants. Property operating expenses typically include utility, insurance, security, janitorial, landscaping and other administrative expenses. We accrue reimbursements from tenants for recoverable portions of all these expenses as revenue in the period the applicable expenditures are incurred. We also receive estimated payments for these reimbursements from substantially all our tenants throughout the year. We do this to reduce the risk of loss on uncollectible accounts once we perform the final year-end billings for recoverable expenditures. We recognize the difference between estimated recoveries and the final billed amounts in the subsequent year and we believe these differences were not material in any period presented.
Under GAAP, we are required to recognize rental income based on the effective monthly rent for each lease. The effective monthly rent is equal to the average monthly rent during the term of the lease, not the stated rent for any particular month. The process, known as “straight-lining” or “stepping” rent generally has the effect of increasing rental revenues during the early phases of a lease and decreasing rental revenues in the latter phases of a lease. Due to the impact of “straight- lining,” rental income exceeded the cash collected for rent by approximately $158,000, $110,000 and $145,000, for the years ended December 31, 2003, 2002 and 2001, respectively. If rental income calculated on a straight-line basis exceeds the cash rent due under the lease, the difference is
20
recorded as an increase in deferred rent receivable and included as a component of accounts receivable on the relevant balance sheet. If the cash rent due under the lease exceeds rental income calculated on a straight-line basis, the difference is recorded as a decrease in deferred rent receivable and is recorded as a decrease of accounts receivable on the relevant balance sheet. We defer recognition of contingent rental income, such as percentage or excess rent, until the specified target that triggers the contingent rental income is achieved. We periodically review the collectability of outstanding receivables. Allowances are generally taken for tenants with outstanding balances due for a period greater than ninety days and tenants with outstanding balances due for a period less than ninety days but that we believe are potentially uncollectible.
Recognition of Lease Termination Income
We recognize lease termination income upon receipt of the income. We accrue lease termination income if there is a signed termination agreement, all of the conditions of the agreement have been met and the tenant is no longer occupying the property.
Cost Capitalization and Depreciation Policies
We review all expenditures and capitalize any item exceeding $1,000 deemed to be an upgrade or a tenant improvement with an expected useful life greater than one year. Land, building and amenities are stated at cost. Depreciation expense is computed using the straight-line method over the estimated useful lives of the assets. Buildings and improvements have estimated useful lives between 3 — 30 years, land improvements have estimated useful lives of between 5 — 30 years, and amenities have estimated useful lives between 3 — 30 years.
Consolidation of Variable Interest Entities
In January 2003, the FASB issued Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an interpretation of ARB 51.” The primary objectives of this interpretation are to provide guidance on the identification of entities for which control is achieved through means other than through voting rights (“variable interest entities”) and how to determine when and which business enterprise (the “primary beneficiary”) should consolidate the variable interest entity. This new model for consolidation applies to an entity which either (i) the equity investors (if any) do not have a controlling financial interest; or (ii) the equity investment at risk is insufficient to finance that entity’s activities without receiving additional subordinated financial support from other parties. In addition, FIN 46 requires that the primary interest entity, make additional disclosures. Certain disclosure requirements of FIN 46 were effective for financial statements issued after January 31, 2003.
21
In December 2003, the FASB issued FIN No. 46 (Revised December 2003), “Consolidation of Variable Interest Entities” (“FIN 46-R”) to address certain FIN 46 implementation issues. The effective dates and impact of FIN 46 and FIN 46-R are as follows:
| (i) | Special purpose entities (“SPEs”) created prior to February 1, 2003. We must apply either the provisions of FIN 46 or early adopt the provisions of FIN 46-R at the end of the first interim or annual reporting period ending after December 15, 2003. |
| (ii) | Non-SPEs created prior to February 1, 2003. We are required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. |
| (iii) | All entities, regardless of whether a SPE, that were created subsequent to January 31, 2003. The provisions of FIN 46 were applicable for variable interests in entities obtained after January 31, 2003. We are required to adopt FIN 46-R at the end of the first interim or annual reporting period ending after March 15, 2004. |
The adoption of the provisions applicable to FIN 46 did not have any impact on our financial statements.
Minority Interest
In May 2003, the FASB issued Statement No. 150, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity (SFAS 150). SFAS 150 establishes standards for classifying and measuring as liabilities certain financial instruments that embody obligations of the issuer and have characteristics of both liabilities and equity. SFAS 150 was effective for all financial instruments created or modified after May 31, 2003, and otherwise was effective at the beginning of the first interim period beginning after June 15, 2003. On November 7, 2003, FASB Staff Position No. FAS 150-3 was issued, which deferred for an indefinite period the classification and measurement provisions, but not the disclosure provisions of SFAS 150.
We consolidate certain properties that are also owned by affiliated parties that have noncontrolling interests. In certain cases, the applicable joint venture agreement provides for a contractual termination date of the agreement based on certain specified events. SFAS 150 describes this type of arrangement as a “limited-life subsidiary”. SFAS 150 requires the disclosure of the estimated settlement value of these noncontrolling interests. As of December 31 2003, the estimated settlement value of these noncontrolling interests is approximately $3,147,000. This settlement value is based on estimated third party consideration paid to the joint venture upon disposition of each property and is net of all other assets and liabilities including any yield maintenance that would have been due on that date had the mortgages encumbering the properties been prepaid on December 31, 2003. Due to the inherent risks and uncertainties related to the operations and sale of real estate assets, among other things, the amount of any potential distribution to the noncontrolling interests is likely to change.
22
The following table includes our selected summarized operating data for the years ended December 31, 2003, 2002 and 2001. This data is presented to provide assistance in identifying trends in our operating results and other factors affecting our business. This data should be read in conjunction with our financial statements, including the notes thereto, in Part II, Item 8 of this report.
The following table of segment data is provided:
2003
-----------------------------------------------------------------------
Residential Commercial Partnership Total
-----------------------------------------------------------------------
Net revenues $ 1,232,075 $ 3,849,055 $ -- $ 5,081,130
Operating expenses and operating
expenses - affiliated 504,459 1,503,159 -- 2,007,618
Depreciation and amortization 228,427 995,648 18,619 1,242,694
Interest expense 278,086 678,678 20,362 977,126
Net income (loss) 101,020 36,307 (799,591) (662,264)
2002
-----------------------------------------------------------------------
Residential Commercial Partnership Total
-----------------------------------------------------------------------
Net revenues $ 1,225,210 $ 3,781,385 $ -- $ 5,006,595
Operating expenses and operating
expense - affiliated 593,838 1,551,296 (2,000) 2,143,134
Depreciation and amortization 226,011 1,094,496 18,619 1,339,126
Interest expense 298,498 720,638 20,362 1,039,498
Net loss (75,047) (248,447) (360,493) (683,987)
2001
-----------------------------------------------------------------------
Residential Commercial Partnership Total
-----------------------------------------------------------------------
Net revenues $ 1,239,900 $ 3,837,244 $ -- $ 5,077,144
Operating expenses and operating
expenses - affiliated 587,947 1,525,985 2,000 2,115,932
Depreciation and amortization 221,236 1,014,017 18,619 1,253,872
Interest expense 317,072 798,266 20,362 1,135,700
Net loss (12,115) (136,911) (261,493) (410,519)
During our most recent operating period net revenues for the residential segment have essentially remained level, while net revenues for the commercial segment have increased primarily due to higher average occupancy at Lakeshore Business Center Phase III as a result of our efforts to lease this recently constructed property. This is partially offset by occupancy decreases at Commonwealth Business Center Phase II, where we have not been successful in renewing several tenants’ expired leases. We continue our leasing efforts by seeking new tenants for this property. Operating expenses and operating expenses — affiliated have decreased primarily as a result of personnel changes for both the residential and commercial segments. Interest expense and depreciation expense have decreased due to lower debt balances and assets becoming fully depreciated, respectively. The expenses related to our ongoing litigation and proposed merger have negatively impacted our partnership net losses.
23
The rental income and tenant reimbursements generated by our properties and joint ventures for the years ended December 31 were as follows:
2003 2002 2001
------------- ------------- --------------
Wholly-Owned Properties
Commonwealth Business Center Phase II $ 472,591 $ 543,963 $ 566,413
Joint Venture Properties
(Ownership % on December 31, 2003)
The Willows of Plainview Phase II (90.30%) (1) $ 1,232,075 $ 1,225,210 $ 1,239,900
Lakeshore Business Center Phase I (81.19%) (1) $ 1,520,509 $ 1,557,015 $ 1,603,765
Lakeshore Business Center Phase II (81.19%) (1) $ 1,446,848 $ 1,390,591 $ 1,454,079
Lakeshore Business Center Phase III (81.19%) $ 409,107 $ 289,816 $ 212,987
| (1) | We believe the changes in rental income and tenant reimbursements from year to year are temporary effects of each property’s specific mix of lease maturities and is not indicative of any known trend. |
The occupancy levels at our properties and joint ventures as of December 31 were as follows:
2003 2002 2001
------------- ------------- --------------
Wholly-Owned Properties
Commonwealth Business Center Phase II 62% 73% 81%
Joint Venture Properties
(Ownership % on December 31, 2003)
The Willows of Plainview Phase II (90.30%) (2) 82% 89% 74%
Lakeshore Business Center Phase I (81.19%) (2) 71% 71% 89%
Lakeshore Business Center Phase II (81.19%) (2) 79% 81% 82%
Lakeshore Business Center Phase III (81.19%) 89% 37% 28%
| (2) | We believe the changes in occupancy on December 31 from year to year are temporary effects of each property’s specific mix of lease maturities and is not indicative of any known trend. |
The average occupancy levels at our properties and joint ventures for the years ended December 31 were as follows:
2003 2002 2001
------------- ------------- --------------
Wholly-Owned Properties
Commonwealth Business Center Phase II 67% 77% 75%
Joint Venture Properties
(Ownership % on December 31, 2003)
The Willows of Plainview Phase II (90.30%) (3) 85% 85% 83%
Lakeshore Business Center Phase I (81.19%) (3) 70% 80% 85%
Lakeshore Business Center Phase II (81.19%) (3) 81% 84% 82%
Lakeshore Business Center Phase III (81.19%) 59% 36% 26%
| (3) | We believe the changes in average occupancy from year to year are temporary effects of each property’s specific mix of lease maturities and is not indicative of any known trend. |
24
The following discussion relating to changes in our results of operations includes only material line items within our Statements of Operations or line items for which there was a material change between the years ending December 31, 2003, 2002 and 2001.
Rental Income and Tenant Reimbursements
Our rental income and tenant reimbursements did not change significantly between the years ending December 31, 2003, 2002 and 2001. There were no offsetting material changes.
Operating Expenses and Operating Expenses – Affiliated
Our operating expenses did not change significantly between the years ending December 31, 2003, 2002 and 2001. There were no offsetting material changes.
Our operating expenses – affiliated for the years ended December 31, 2003, 2002 and 2001 were approximately $572,000, $675,000 and $630,000, respectively. The decrease of $103,000, or 15%, from the year ended December 31, 2002 to the year ended December 31, 2003 and the increase of $45,000, or 7%, from the year ended December 31, 2001 to the year ended December 31, 2002 were both the result of changes in personnel costs.
Operating expenses – affiliated are for the services performed by employees of NTS Development Company, an affiliate of our General Partner. These employee services include property management, leasing, maintenance, security and other services necessary to manage and operate our business.
Professional and Administrative Expenses and Professional and Administrative Expenses –Affiliated
Our professional and administrative expenses for the years ended December 31, 2003, 2002 and 2001 were approximately $661,000, $233,000 and $119,000, respectively. The increase of $428,000, or 183%, from the year ended December 31, 2002 to the year ended December 31, 2003 and the increase of $114,000, or 95%, from the year ended December 31, 2001 to the year ended December 31, 2002 was primarily due to increased legal and professional fees associated with our proposed merger and litigation filed by limited partners. See Part II, Item 8 — Note 8 and Note 11 for information regarding our proposed merger and our litigation filed by limited partners.
Our professional and administrative expenses – affiliated for the years ended December 31, 2003, 2002 and 2001 were approximately $187,000, $168,000 and $185,000, respectively. The increase of $19,000, or 11%, in 2003 is due to increased salary costs. The decrease of $17,000, or 9%, in 2002 is due to decreased salary costs.
25
Professional and administrative expenses — affiliated are for the services performed by employees of NTS Development Company, an affiliate of our General Partner. These employee services include legal, financial and other services necessary to manage and operate our business.
Depreciation and Amortization
Our depreciation and amortization for the years ended December 31, 2003, 2002 and 2001 were approximately $1,243,000, $1,339,000 and $1,254,000. The decrease of $96,000, or 7%, from the year ended December 31, 2002 to the year ended December 31 2003 and the increase of $85,000, or 7%, from the year ended December 31, 2001 to the year ended December 31, 2002 are primarily due to a change in estimate, by management, of the useful lives of the Lakeshore Business Center Phase I roofs from 30 years to 16.5 years in anticipation of replacing the roofs. The roofs became fully depreciated in December 2002. The aggregate cost of the Partnership’s properties for federal tax purposes is $42,053,881.
Interest Expense
Our interest expense for the years ended December 31, 2003, 2002 and 2001 was approximately $977,000, $1,039,000 and $1,135,000, respectively. Our interest expense did not change significantly between the years ending December 31, 2003 and 2002. The decrease of $96,000, or 9%, from the year ended December 31, 2001 to the year ended December 31, 2002 was primarily due to regular principal payments on the mortgages at Lakeshore Business Center Phases I and II and The Willows of Plainview Phase II.
The majority of our cash flow is derived from operating activities. Cash flows used in investing activities consist of amounts spent for capital improvements at our properties. Cash flows used in financing activities consist of principal payments on mortgages payable and payment of loan costs. We do not expect any material changes in the mix and relative cost of capital resources from those in 2003.
The following table illustrates our cash flows provided by or used in operating activities, investing activities and financing activities:
2003 2002 2001
-------------- ------------- -------------
Operating activities $ 798,627 $ 335,459 $ 751,273
Investing activities (858,537) (502,135) (520,684)
Financing activities 15,430 (279,971) (644,998)
-------------- ------------- -------------
Net decrease in cash and equivalents $ (44,480)$ (446,647)$ (414,409)
============== ============= =============
26
Net cash provided by operating activities increased from approximately $335,000 for the twelve months ended December 31, 2002 to approximately $799,000 for the twelve months ended December 31, 2003. The increase is primarily due to the change in accounts payable and accounts payable — affiliate. This is due to our outstanding payables for professional services related to our litigation filed by limited partners and pending merger as well as reimbursements of salary and overhead expenses due to NTS Development Company. Net cash provided by operating activities decreased from approximately $751,000 for the twelve months ended December 31, 2001 to approximately $335,000 for the twelve months ended December 31, 2002. The decrease is primarily due to cash payments to reduce our outstanding accounts payable and increased net loss from operations.